Intertemporal Choice Empirics April 5, 2017 David Laibson

Outline Preference reversals Commitment Other types of studies

1. Preference reversals Quasi-hyperbolic discounters will tend to choose patiently when choosing for the future and impatiently when choosing for the present.

Read, Loewenstein & Kalyanaraman (1999) Choose among 24 movie videos Some are “low brow”: Four Weddings and a Funeral Some are “high brow”: Schindler’s List Picking for tonight: 66% of subjects choose low brow. Picking for 7 days from now: 37% choose low brow. Picking for 14 days from now: 29% choose low brow.

Read and van Leeuwen (1998) (data from sated/sated condition) Choosing Today Eating Next Week Time If you were deciding today, would you choose fruit or chocolate for next week?

Patient choices for the future: Choosing Today Eating Next Week Time Today, subjects typically choose fruit for next week. 74% choose fruit

Impatient choices for today: Choosing and Eating Simultaneously Time If you were deciding today, would you choose fruit or chocolate for today?

Time Inconsistent Preferences: Choosing and Eating Simultaneously Time 70% choose chocolate

See Badger et al (2007) for a related example with heroin addicts given the time-dated reward of buprenorphine (“bup”), a heroin partial agonist small sample warning (n=13)

Also see related study by Sadoff, Samek, and Sprenger (2015)

Extremely thirsty subjects McClure, Ericson, Laibson, Loewenstein and Cohen (2007) Choosing between, juice now or 2x juice in 5 minutes 60% of subjects choose first option. Choosing between juice in 20 minutes or 2x juice in 25 minutes 30% of subjects choose first option. We estimate that the 5-minute discount rate is 50% and the “long-run” discount rate is 0%. Ramsey (1930s), Strotz (1950s), & Herrnstein (1960s) were the first to understand that discount rates are higher in the short run than in the long run.

Money now vs. money later Thaler (1981) Hypothetical rewards (but many experiments use real rewards) Baseline exponential discounting model: Y = d t X So -lnd = (1/t) ln [X/Y], remember that t is in units of yrs What amount makes you indifferent between $15 today and $X in 1 month? X = 20 -lnd = (1/t) ln [X/15] = 12 ln [X/15] = 345% per year What amount makes you indifferent between $15 today and $X in ten years? X = 100 -lnd = (1/t) ln [X/15] = (1/10) ln [X/15] = 19% per year

But … “money earlier vs. money later” (MEL) has so many confounds (Chabris, Laibson, and Schuldt 2009 Cohen, Ericson, Laibson, White 2017) Unreliability of future rewards (trust; bird in the hand; Andreoni and Sprenger 2010) Transaction costs (especially when asymmetric) Investment vs. consumption (money receipt at date t is not, necessarily a utils event at date t) Curvature of utility function (see Harrison et al for partial fixes) Framing and demand characteristics (e.g., response scale; Beauchamp et al 2013) Sub-additivity (Read, 2001; Benhabib, Bisin, and Schotter 2008) (Hypothetical rewards) Psychometric heuristics (Rubinstein 1988, 2003; Read et al 2011; White et al 2014)

Why are money questions unsuited to measuring discounting even in theory? If an agent is not liquidity constrained, she should maximize NPV when asked about money now vs. money later. Note that NPV is based on market interest rates, not time preferences. After maximizing NPV, she should pick her indifference point using time preferences.

Separation theorem: pick payment to maximize NPV, regardless of time preference (then locate along efficient frontier) Later $7 later o o slope = -(1+r) o $5 now Now

But … “money earlier vs. money later” (MEL) has so many confounds (Chabris, Laibson, and Schuldt 2009) Unreliability of future rewards (trust; bird in the hand; Andreoni and Sprenger 2010) Transaction costs (especially when asymmetric) Investment vs. consumption (money receipt at date t is not, necessarily a utils event at date t) Curvature of utility function (see Harrison et al for partial fixes) Framing and demand characteristics (e.g., response scale; Beauchamp et al 2013) Sub-additivity (Read, 2001; Benhabib, Bisin, and Schotter 2008) (Hypothetical rewards) Psychometric heuristics (Rubinstein 1988, 2003; Read et al 2011; White et al 2014)

White, Ericson, Laibson, and Cohen (2014) (see also Read, Frederick and Scholten 2013) Proportional reasoning explains inter-temporal choices in MEL tasks better than discounting models (including present-biased discounting). Probability of choosing larger, later reward (x2,t2) over smaller, earlier reward (x1,t1). Improvement of 6 percentage points of predictive accuracy in cross-validation study (i.e., out of sample prediction)

Augenblick, Niederle, and Sprenger (2015) “Three period work experiment: 0, 2, 3” At date 0: How hard do you want at work at 2 and at 3? At date 2: How hard do you want to work at 2 and at 3? At date 2, subjects tend to shift work from 2 to 3. Estimated parameters: β = 0.927; δ = 0.997 Subjects are willing to commit at date 0 (48/80 commit). But they are generally unwilling to pay to commit. For those who commit: β = 0.881; δ = 1.004

Augenblick, Niederle, and Sprenger (2015) “Three period money experiment: 1, 4, 7” At date 1: How much money do you want at 4 and at 7? At date 4: How much money do you want at 4 and at 7? At date 4, subjects barely shift money to 4 from 7. Estimated parameters: β = 0.974; δ = 0.998.

Augenblick, Niederle, and Sprenger (2015) Limited preference reversals in the domain of money (as predicted by the model of present bias) Present bias observed in the “consumption” version of the experiment.

Outline Preference reversals Commitment Other evidence

Stickk Ayres, Goldberg and Karlan: Stickk.com

Clocky

Tocky

Shreddy™

SNUZ N LUZ

“Freedom” The granddaddy of the Internet restriction programs is Freedom. Set the $10 program and you'll be barred from surfing the net for up to eight hours at a time. Claim to have 100,000 users. Also, most of us have deleted apps from our phones or ipads at some point in our lives (and not just to clear space on our hard drive).

Ashraf, Karlan, and Yin (2006) Offered a commitment savings product to randomly chosen clients of a Philippine bank 28.4% take-up rate of commitment product (either date-based goal or amount-based goal) More “hyperbolic” subjects are more likely to take up the product After twelve months, average savings balances increased by 81% for those clients assigned to the treatment group relative to those assigned to the control group.

Gine, Karlan, Zinman (2009) Tested a voluntary commitment product (CARES) for smoking cessation. Smokers offered a savings account in which they deposit funds for six months, after which take urine tests for nicotine and cotinine. If they pass, money is returned; otherwise, forfeited 11% of smokers offered CARES take it up, and smokers offered CARES were 3 percentage points more likely to pass the 6-month test than the control group Effect persisted in surprise tests at 12 months.

Kaur, Kremer, and Mullainathan (2010): Compare two piece-rate contracts: Linear piece-rate: w per unit produced Linear piece-rate with penalty if worker does not achieve production target T (“Commitment”) Earn w/2 for each unit produced if production < T Jump up at T, returning to baseline contract T Earnings Production Never earn more under commitment contract May earn ½ as much Consider an employee working on a simple piece rate activity – like a repetitive task done many times Many examples like this: supermarket checkout / cashier, assembly line worker, delivery person, salesperson, data entry operator, just to name a few. Compare 2 types of contracts the employee could be offered: Give the employee wage w for every unit of work that she does (blue line on the graph) Give the employee w if she meets some production target T, give her w/2 if she falls below target (red line on the graph) - Notice the employee can never earn more under the commitment contract, and may earn much less if she fails to meet target

Kaur, Kremer, and Mullainathan (2015): Demand for Commitment: Commitment contract (Target > 0) chosen 35% of the time Effect on Production: Being offered commitment contract increases average production by 2.3% relative to control Among all participants, being offered the commitment contract is equivalent (in output effect) to a 7% increase in the piece-rate wage Participants above the mean pay-day cycle sensitivity are 49% more likely to demand commitment and their productivity increase is 9% (equivalent to a 27% increase in wage) These are coefficient estimates from regressions with controls Demand for commitment regression – evening/morning inference: chose_commitment = const + eve_choice_dummy + lag_prodn + lag_prodn*eve_choice + {controls including FE for employees, day of week, week #} Effect on production regression – effect on output: production = const + choice_dummy + lag_prodn + lag_prodn*choice + {controls including FE for employees, day of week, week #} Payday results: Overall, there is not a huge difference in average demand for commitment contracts on paydays vs non-paydays. However, there is a big difference in the likelihood of picking in the morning/evening on paydays vs. non-paydays. Basically, on non-paydays, people are more likely to choose commitment in advance (i.e. the evening before). However, the opposite is true on paydays – if people know Tuesday is their payday, they are much more likely to choose a commitment contract for Tuesday on Tuesday morning than on Monday evening.

Houser, Schunk, Winter, and Xiao (2010) In a laboratory setting, 36.4% of subjects are willing to use a commitment device to prevent them from surfing the web during a work task

Royer, Stehr, and Sydnor (2011) Commit to go to the gym at least once every 14 calendar days (8 week commitment duration) Money at stake is choice of participant. Money donated to charity in event of failure. Fraction taking commitment contract: Full sample: 13% Gym Members: 25% Gym Non-members: 6% Average commitment = $63; max = $300, 25th pct = $20; 75th pct = $100.

Ariely and Wertenbroch (2002) Proofreading tasks: "Sexual identity is intrinsically impossible," says Foucault; however, according to de Selby[1], it is not so much sexual identity that is intrinsically impossible, but rather the dialectic, and some would say the satsis, of sexual identity. Thus, D'Erlette[2] holds that we have to choose between premodern dialectic theory and subcultural feminism imputing the role of the observor as poet.“ Evenly spaced deadlines ($20) Self-imposed deadlines ($13) subjects in this condition could self-impose costly deadlines ($1 penalty for each day of delay) and 37/51 do so. End deadline ($5)

Alsan, Armstrong, Beshears, Choi, del Rio, Laibson, Madrian and Marconi (2014) Voluntary Commitment Arm No Commitment Arm Get paid $30 per clinical visit, only if you are medically adherent Get paid $30 per clinical visit, whether or not you are medically adherent. Get paid $30 per clinical visit, whether or not you are medically adherent. 32% 68% Here is the visual we have been using in the prepilot survey to clarify the two different plans. small sample warning (n=40)

Voluntary commitment arm No commitment arm

Study of rickshaw peddlers who are given access to commitment technologies Schilbach (2015) Alcohol commitment (sobriety contingent payments) Savings commitment (lockbox)

Commitment Technology for Alcohol Avoidance Rickshaw cyclers choose either incentive payment based on BloodAlcoholContent or unconditional payment. Incentive Payment Unconditional Payment

How to design a commitment contract Participants divide $$$ between: Freedom account (22% interest) Goal account (22% interest) withdrawal restriction Beshears, Choi, Harris, Laibson, Madrian, Sakong (2016)

Initial investment in goal account 10% penalty 35% Freedom Account 65% Goal account 20% penalty 43% Freedom Account 57% Goal account No withdrawal Freedom Account 56% 44%

49.9% allocated to freedom account Now participant can divided their money across three accounts: (i) freedom account (ii) goal account with 10% penalty (iii) goal account with no withdrawal 49.9% allocated to freedom account 16.2% allocated to 10% penalty account 33.9% allocated to no withdrawal account Beshears, Choi, Harris, Laibson, Madrian, Sakong (2016)

Outline Preference reversals Commitment Other evidence

Dellavigna and Malmendier (2004, 2006) Average cost of gym membership: $75 per month Average number of visits: 4 Average cost per vist: $19 Cost of “pay per visit”: $10 (Also measure intentions)

Sampling of other studies Della Vigna and Paserman (2005): job search Duflo (2009): immunization Duflo, Kremer, Robinson (2009): commitment fertilizer Burks, Carpenter, Goette, & Rustichini (2009): Truck driver study Milkman et al (2008): video rentals return sequencing Sapienza and Zingales (2008,2009): procrastination Trope & Fischbach (2000): commitment to medical adherence Wertenbroch (1998): individual packaging of temptation goods

Household finance studies Angeletos, Laibson, Repetto, Tobacman, and Weinberg (2001) Della Vigna and Paserman (2005): job search Duflo, Kremer, Robinson (2009): commitment fertilizer Meier and Sprenger (2010): correlation with credit card borrowing Shui and Ausubel (2006): credit cards Shapiro (2005): consumption cycle over month Mastrobuoni and Weinberg (2009): consumption cycle over month Laibson, Maxted, Repetto, and Tobacman (2016): MSM estimation using wealth and debt moments Kuchler (2014): credit card debt paydown Lockwood (2016): design of EITC Willis (2016): take-up of crop insurance Blumenstock, Callen, and Ghani (2017): defaults and present-bias

Outline Preference reversals Commitment Other types of studies